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Drug Channels delivers timely analysis and provocative opinions on pharmaceutical economics and the drug distribution system. It is written by Adam J. Fein, Ph.D., one of the country's foremost experts on pharmaceutical economics and channel strategy. Drug Channels reaches an engaged, loyal and growing audience of more than 26,000 subscribers. Learn more...

Monday, October 29, 2007

I want to let you know about a webinar this Wednesday called Demystifying 867 Analytics, which looks at the use of point-of-sale data from retailers and wholesalers. You should sign up and listen.

Yes, I know, webinars are usually boring, but this one will benefit from the presence of Josh Halpern and Jeff Sager from Integrichain. In my opinion, Integrichain is quickly becoming the leader in providing demand visibility at the outlet/point-of-care level to pharmaceutical manufacturers.

I’ve been particularly impressed with the company’s ability to connect multiple data streams from the pharmaceutical supply chain -- ex-factory sales data, wholesaler data (EDI 867 and 852 transaction sets), and third party data. Integrichain’s outlet-focused, bottoms-up (my words) methodology should also allow new data sources, such as ePedigree information, to be easily incorporated. In other words, they are not beholden to a single data stream or data provider.

Key quote: “Rick Schnall, a senior executive of buyout firm Clayton, Dubilier & Rice, said McKesson has one of the best managements in the health-care business. He said "many private-equity firms would love to figure out a way" to buy it, though he said it is unlikely that such big deals will take place until difficulties in the credit markets pass.”

For those who don’t know, CD&R is a top-tier buyout fund that has been very successful with distribution businesses. They are currently invested in large distributors of electrical supplies (Rexel), lab supplies (VWR), food (US Foodservice), and building supplies (HD Supply). Click here to see a selection from their current portfolio.

As I see it, McKesson is the most logical LBO target among the Big 3 wholesalers, especially given its business mix, current operating platform, and age of the management team. Their acquisition of OTN, while pricey, improves their leverage in the fast growing specialty distribution business. A buyout would provide a platform for a transformational restructuring and open up some intriguing domestic and international acquisition opportunities.

BTW, McKesson’s Net Debt-to-EBIDTA ratio was actually negative(!) based on second quarter financials, making the company especially attractive to private equity. (Net Debt = Short Term Debt + Long Term Debt – Cash & Cash Equivalents, so the numerator in this ratio is negative.) McKesson’s enterprise value is $17.1 billion, which is certainly affordable once the credit markets settle down.

Drug wholesalers are listening to Tony Blair at their Annual Leadership Meeting this week. The WSJ story should create some interesting hallway chatter.

Then watch Bill Maher's video below on the pharma industry. Sure, he takes some cheap shots at our industry, but he does have a valid point in a land of 920 calorie burritos. (Warning: Do NOT watch this video if you have no sense of humor or are easily offended by people like Bill Maher.)

Best line: "So ask your doctor if getting off your ass is right for you!"

Retail pharmacy is becoming extremely effective at defining the legislative agenda and terms of debate. My Lobbying for Pharmacy Profits from January 2 should have been even more aggressive.

I have been very personally disappointed with the amount of nonsense being spewed out there about AMP, Part D, and the future of retail pharmacy. Many public statements have been either factually incorrect or grossly misleading.

Seriously, is anyone else trying to provide any balance on these legislative decisions? PCMA, the trade association representing Pharmacy Benefit Managers, could only muster a bland and uninspired press release stating:

“Before rushing to judgment on the issue of 'prompt pay,' Congress should commission GAO to conduct an independent study to explore this issue generally and the role played by Pharmacy Service Administrative Organizations (PSAOs) particularly.”

Too late – judgment rushing is over! Should we presume that their weak defense indicates tacit approval of the FAST legislation?

Here’s some food for thought from PBMguru, who posted a very interesting comment to this blog a few weeks ago:“The reality is that most PBM clients are self insured SMB’s (because most of the insured populace is covered by a self-insured SMB). These clients are no different than your independent pharmacies. They are both small businesses trying to compete in today’s marketplace. All of these businesses operate under their own respective billing payment cycles…who is to say which of the small businesses are more deserving of the money? Should we penalize SMB’s for providing a benefit to their employees or should we penalize retail and chain pharmacies for conducting business?”

Friday, October 19, 2007

Pfizer may have to end or amend its exclusive distribution deal with UniChem, the wholesale arm of Alliance Boots (AB), under proposals being considered by the Office of Fair Trading (OFT). See Pfizer May Have To Unpick Exclusive Distribution from the Times (London).

Pfizer’s new plan (first discussed here last September) has at least two primary objectives: (1) Lower the risk of counterfeit products entering the supply chain, and (2) Recapture lost revenue from parallel importing.

My prediction: The OFT will require Pfizer to expand its network to at least one other wholesaler, but not require them to sell to all wholesalers.

Yet wholesalers have been much quieter about the announcements from other manufacturers like Sanofi-Aventis or Novartis, especially since these manufacturers plan to include other wholesalers (AAH or Phoenix). From what I hear, most major drug makers will announce more selective UK distribution plans by the end of 2007.

Frankly, the whole issue really comes down to basic business economics. Manufacturers in many industries can and do legitimately limit the number of wholesalers who are authorized to sell its products. Channel mavens like me refer to the degree of distribution selectivity – from one wholesaler (exclusive distribution) to an unrestricted number of wholesalers within a given market (intensive distribution).

I believe that any excluded UK wholesalers will continue their attempts to stop Pfizer (or others) from implementing strictly exclusive distribution, but will not be able to stop selective distribution.

It’s interesting to note the contrast with the U.S. Here, U.S. wholesalers successfully stopped the FDA from implementing the pedigree requirements in the Prescription Drug Marketing Act. Robert Drucker is probably a hero to any non-selected UK wholesalers given his company’s legal battle against the big three wholesalers and 16 major drug manufacturers. (See RxUSA’s July 2006 complaint for the alleged details.)

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P.S. Readership at Drug Channels is waaaay up since last year. In case you weren’t reading back in August ‘06, here is a background post on European drug channels: Curious about European Drug Distribution?

Although it’s a little early for Halloween, I want to give you some scary nightmares about a new monster that could walk among us very soon.

As I see it, the Part D debate and the Average Manufacturer Price (AMP) debate will soon converge. This potent combination would disrupt the retail pharmacy and drug wholesale industry while simultaneously crippling the innovative capacity of the pharmaceutical industry.

AWP Lives!

Page 14 of the new report on private Medicare drug plans provides some interesting data about pharmacy economics under Part D. The 12 Prescription Drug Plans (PDPs) in the Committee’s report reimburse pharmacies using the following formulas and payments:

Discount off AWP: 13.5% to 16.5%

Dispensing fees: $1.70 to $4.00

The Committee found that the average pharmacy payment from Part D insurers = AWP-15% + $2.10. Thus, a pharmacy would receive a payment (reimbursement) from the PDP of $87.10 for filling a Part D script with an AWP of $100.

NCPA keeps complaining about "low and slow" payments under Part D. I discussed the "slow" myth last month. Seems like they should turn down the rhetoric on "low" payments, too. What do pharmacists want -- AWP + 250%??

As an aside, the report incorrectly states that this amount represents a cost to the Medicare beneficiary. In fact, only beneficiaries in the “donut hole” would pay this amount as an out-of-pocket cost, assuming they had no additional coverage. According to IMS’ Part D report, just 6% of beneficiaries fell into this category. That’s not “typical” (common, average) based on my definition, although the headline to Figure 7 claims to show the “Flow of Payments for a Typical Brand Name Drug.” Whatever.

The Part DAMP Monster

Let’s review a few themes from the past few months of Drug Channels:

The AWP system is wounded and can not be repaired. (Sorry to be the bearer of bad news…) The new Part D report trashes AWP in Section D.

CMS and the states currently pay for 40 percent of U.S. retail prescription drugs through Medicaid, SCHIP, and Medicare. It'll be 50% within 10 years.

Thursday, October 11, 2007

Well, it turns out that the introduction of Average Sales Price (ASP) reimbursement for Medicare Part B did not signal disaster for community oncologists or their patients. Might I be so bold as to suggest some parallels to the current doom-and-gloom over Average Manufacturer Price (AMP) reimbursement for Medicaid?

My question is sparked by two recent studies that assess ASP with the benefit of hindsight.

Most oncology practices are purchasing products below ASP. A June 2007 OIG study found: “Nine of the twelve practices reviewed could generally purchase drugs related to the 15 selected payment codes for the treatment of cancer patients at or below the MMA-established reimbursement rates from April 1 through June 30, 2005.”

Guess what was predicted back in 2003?

No surprise -- community oncologists were furious about the 2004 introduction of the Average Sales Price (ASP) methodology for Medicare Part B.

See if the following quotes from the American Society of Clinical Oncology (ASCO) in November 2003 evoke a sense of déjà vu:

“The legislation shifts reimbursement for cancer drugs to a system that will not cover the prices of chemotherapy drugs available to many community practices, ASCO contends.”

“We remain concerned that this legislation will hinder access to cancer care for many elderly Americans.”

"The impacts on practices will be far-reaching and severe. Some practices will have to cut back on the number of Medicare patients they treat, or stop treating Medicare patients all together. For some patients, treatment will be delayed, if it can be done at all."

At one level, ASCO was correct. The existing system changed as individual practices modified their businesses. Yet the new payment methods also created new care delivery business models. (See my comments on creative destruction in the pharmacy supply chain from June.) The two studies cited above show that many of the devasting effects never happened.

ASCO’s doom-and-gloom should be familiar to readers of this blog because today’s pharmacy industry is making the similar arguments about AMP. Just look over the Reactions to AMP and read about "reckless disregard for patient welfare" or the "assault on neighborhood pharmacies." All this for a change that will reduce pharmacy reimbursement by less than 0.5% in 2008.

Similarly, I'm skeptical about patient access fearmongering. As I point out in Heretical Questions about the AMP War, consumers using independent pharmacies have access to many pharmacies within a reasonable driving distance.

Mark Twain once said: "History doesn't repeat itself, but it rhymes." With that quote in mind, what do you think we will reading in 2011 about the impact of AMP on retail pharmacy?

Monday, October 08, 2007

Maybe you'll ask the same question after reading three stories sent in by intrepid Drug Channels readers:

I'll have a Viagra Chimichanga, extra salsaLa Mexican is a Fort Myers restaurant/pharmacy/check cashier that serves you real Mexican food along with your counterfeit drugs -- mostly fakes from Mexico and Europe. According to the article: "The illegal distribution of prescription drugs is an increasing problem in Southwest Florida, said Larry Long, spokesman for the FDLE in Fort Myers." Overall, we've seen an increase in people obtaining prescription medicines illegally," he said. "People are dying from overdoses of prescription medicines." Senator Byron Dorgan is reportedly going to hold hearings to make sure La Mexican did not use Canadian beef.

#1 in Medicare Fraud
According to a new OIG report, Florida is now the leader in Medicare fraud for HIV/AIDS drugs. (See Aberrant Billing In South Florida For Beneficiaries With HIV/AIDS.) Providers in just three south Florida counties -- Miami-Dade, Broward, and Palm Beach -- accounted for 8 percent of Medicare beneficiaries with HIV/AIDS but billed Medicare more than 22 times as much as the entire rest of the U.S.! The OIG glumly notes: "CMS has had limited success in controlling the aberrant billing practices of South Florida infusion therapy providers." Oh.

Still #1 in Diversion!
In August, Florida's Diversion Response Team reported another banner year in its 2006-07 Annual Report. According to the report, the DRT opened 50 new diversion cases from in the 12 months ending June 30, 2007. Yes, that's the first year of Florida's pedigree law. Alas, no report from the year before the pedigree law.

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Unfortunately, these are just the two most recent episodes in Florida's shameful drug distribution history.

Friday, October 05, 2007

Although the move looks like nothing more than a horizontal distribution acquisition, it actually represents the ongoing vertical consolidation of the specialty channel. And as the channels to the non-retail customer gets narrower, combined distributor-GPO entities gain leverage.

Owning the Customer

After this deal closes, the two largest community oncology GPOs for physician practices will be under common ownership of specialty products distributors. Such forward integration makes it virtually impossible for a manufacture to bypass and sell directly to the customer -- because the distributor and the customer are the same company!

AmericourceBergen (ABC) uses this strategy to great success. ION, the largest community oncology GPO, has a prime vendor distribution arrangement with Oncology Supply. Both organizations are part of AmerisourceBergen’s Specialty Group, which has accounted for almost all of the entire company’s revenue growth over the past five years.

Did you know that more than 40% of Amgen's (AMGN) U.S. sales go through ABC? McKesson and Cardinal Health (CAH) combined represent less than 30% of Amgen's U.S. sales.

The acquisition of OTN now links McKesson with Onmark, which I estimate to be the second largest community oncology GPO behind ION. Note that McKesson also acquired National Oncology Alliance, a small GPO, in April 2006.

Another observation – OTN moved to self-distribution in June ’06 by announcing that UPS Supply Chain Solutions would be handling distribution for their oncology network members. I presume that this logistics deal will be unwound and the volume moved to McKesson.

If so, it represents further evidence of wholesalers’ strength in smaller, high service customers such as physician offices and clinics. Large retail chains can (and increasingly do) use their own warehouses to bypass wholesalers. In contrast, smaller customers genuinely benefit from the services provided by a wholesaler and are much more difficult for a manufacturer to serve directly, even with the help of a third-party logistics company.

BTW, this trend is being repeated in many industries outside health care. In my new book Facing the Forces of Change®: Lead the Way in the Supply Chain, I surveyed manufacturers from a range of industries about their perceptions of logistics companies versus wholesalers. (If you have the book, see Exhibit 3-4.) The past 3 years have not noticeably advanced the perceived competitiveness of third-party logistics providers versus wholesalers compared to a similar survey that I conducted in 2003.

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As I predicted back in January, consolidation within the U.S. pharmaceutical infrastructure – the network of companies that facilitate dispensing and payment of pharmaceuticals -- keeps moving ahead.

But as I noted last week, chains such as CVS Corp (CVS) or Walgreens (WAG) are not really vulnerable to Wal-Mart’s program because customers with third-party insurance do not save much versus standard co-pays.

My take: payers and pharmacy benefit managers now recognize the generic profit potential, so they are squeezing pharmacies sooner and harder than ever before.

Wal-Mart's Math

In contrast, Wal-Mart’s program highlights the high generic margins embedded in the pharmacy business model, especially for cash-pay customers. Yet Wal-Mart’s $4 generics program is neither a loss leader nor a “classic bait-and-switch,” as the National Community Pharmacists Association claims.

Six of the generic drugs in the OIG study also appear on Wal-Mart’s list. Here’s what I found:

Weighted average margin = 24%. These calculations dramatically underestimate Wal-Mart’s actual gross margin because Wal-Mart's product acquisition costs are much lower than the independents, supermarkets, and small chains that buy through wholesalers. (See my January post for background.)

BTW, these margins are below what retail pharmacies were earning when dispensing generics under Medicaid in 2002. But isn’t that what led to Average Manufacturer Price (AMP) in the first place?

For fun (?), I searched for a few drugs on the New York State Attorney General’s Office Prescription Drug Price Website. Example: the cash-pay, no-insurance price for Metformin 500 mg ranges from $4 at Target or Wal-Mart to more than $50 at many independents. CVS charges $24.89 and Walgreen (WAG) charges $29.99. I checked some online prices and found similar numbers – Drugstore.com charges $39.99.

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Last week, NCPA accused Wal-Mart of "devaluing and destroying the practice of pharmacy." From my perspective, it looks like retail pharmacy is finally facing the consequences of their own business decisions. Wal-Mart is merely targeting an area of excess profits, to the ultimate detriment of less-efficient retail pharmacies. Stay tuned – this will get uglier!

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